Posts from Thursday Feb 3 2011

Further further reading

For the commute home, or for kicking off the year of the rabbit

- The UK and US fear different black swans Read more

SEC brings further charges against expert network employees

Expert networks are being made to look increasingly amateurish.

The SEC on Thursday charged six expert network consultants and employees from Primary Global Research with insider trading and illegal tipping of hedge funds and other clients. Read more

Nippon and Sumitomo in steel tie-up

Nippon Steel and Sumitomo Metal, two of Japan’s largest steelmakers, aim to merge next year to help them cut costs and keep up with fast-growing Chinese rivals, the FT reports. The deal, if completed, would lift the new company into second place in global crude steel output behind Luxembourg-based ArcelorMittal. Nippon Steel itself had been number two until the global economic crisis crippled demand from its main customers in Japan’s car industry. Production has rebounded during the past year but the company remains in a close fight for scale with Baosteel of China and Posco of South Korea. Shoji Muneoka, Nippon Steel’s president, said the merger would give the new company the added financial and management clout it needs to expand overseas. Japan remains a top steel exporter, but a strong yen and the rising cost of iron ore and coking coal are putting pressure on companies to shift more production abroad.

Afghans resist IMF call to sell bank

The IMF has urged Afghanistan to wind down and sell off Kabul Bank to stabilise the financial system, according to the governor of the country’s central bank, reports the FT. Afghan officials fear, however, that any move to place the country’s largest bank into receivership may trigger renewed panic in the banking sector, rocked by Kabul Bank’s near-collapse amid corruption allegations five months ago. A protracted dispute over the lender’s fate could complicate attempts by donors to boost aid flows to shore up the government of Hamid Karzai, president, against a spreading insurgency, while further straining its ties with the west.

Rating agencies buoyant on year ahead

Moody’s Investors Service and Standard & Poor’s have forecast another strong year of revenue growth, underlining the continued profitability of the credit rating agencies in spite of sharp criticism over their role in the financial crisis, the FT reports. Regulators are continuing to flesh out legislation aimed at curbing the conflicts of interest which result from the business model used by Moody’s and S&P, where sellers of debt pay for the credit ratings included on that debt when it is sold. The regulatory requirements have imposed extra costs on rating agencies, but have so far not severely dented the business model which underpins the biggest groups. As a result, Moody’s and S&P continue to play a central role in the capital markets and new sales of debt often include a rating from one or both agencies.

US deficit warning sends Treasury yields higher

While Ben Bernanke may not have given any signs that quantitative easing would let up, he did sound alarms about the long-term US fiscal position, which sent Treasury yields near their highs, the FT reports. Meanwhile, gold was in demand but the euro was sold off as investors struggled to decipher the direction of interest rates in Europe, after Jean-Claude Trichet, European Central Bank president, said there were “short-term” inflation pressures. Benchmark 10-year Treasury bond yields ticked higher again, up 7bp to 3.55 per cent, just shy of their recent peak in December. Beyond 3.56 per cent, there are May highs, just before the European sovereign debt crisis came into focus. Gold saw an in-rush of demand after two weeks of stale movements, with gold in euro terms adding 2.8 per cent to €994 an ounce, while the dollar price rose 1.5 per cent to $1,353. Concerns over the Middle East were not much of a factor. Stock indices initially fell after violent protests in Egypt flared, though US and European shares climbed higher after Mr Bernanke and Mr Trichet spoke. The FTSE Eurofirst 300 closed flat at 1,162, up from a decline of 0.4 per cent. Brent crude oil fell 0.6 per cent to $101.68, below the $103 price point it had reached as Middle East tensions threatened to interrupt supply.

JPMorgan risk officer warned on Madoff

A senior JPMorgan Chase risk officer was warned that Bernard Madoff had “a well-known cloud” over his head and was suspected of running a Ponzi scheme nearly 18 months before the New York broker was charged with presiding over a $19.6bn fraud, according to a newly unsealed court filing, reports the FT. The allegation is part of a $6.4bn lawsuit filed against the US bank by Irving Picard, the trustee charged with recovering money for Mr Madoff’s victims. The lawsuit seeks to recover $1bn in fees and profits that JPMorgan reaped as the primary banker to Mr Madoff’s business and by structuring Madoff-related derivatives, plus $5.4bn in damages.

Bernanke warns on ‘wide’ deficit

Ben Bernanke, chairman of the US Federal Reserve, has made one of his strongest calls yet for Congress to deal with what he called an “extraordinarily wide deficit”, the FT reports. “The long-term fiscal challenges confronting the nation are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors,”Mr Bernanke said in a speech at the National Press Club in Washington. Mr Bernanke has warned about the fiscal deficit before, but his speech represents a sharper call for action on a gap that is now running at 9-10 per cent of gross domestic product. “Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on US output, incomes and standards of living,” he said.

Bernanke to journalists: you’re awesome, now here’s an update

He began his speech to the National Press Club by buttering up the journalists in the crowd — “Your job is not easy, but it is essential” (thanks) — before moving on to more substantive matters.

First an update on the employment situation ahead of Friday’s big nonfarm payrolls report: Read more

S&P: yeah, housing is still terrible

S&P has updated its pessimistic outlook for the housing market this year to reflect the recent, expectations-beating data on new and pending home sales — and remains unimpressed.

From the report: Read more

Legerdemath, or, derivatives dubiousness

Currently doing the rounds — an alleged instance of derivatives fraud, or at least, mispractice. With individual names (Omer Rosen) and banks (Citigroup) attached.

It’s written for the Boston Review, by Rosen, and titled ‘Legerdemath.’ Read more

Greece as a CDO

One way to think about EFSF-financed Greek bond buybacks is as an informal exercise in a collateralisation and tranching of sovereign debt.

An exercise, in short, in converting a country into a collateralised debt obligation. Read more

The Angelo Mozilo foreclosure fund

Pop this in the bittersweet irony chapter of the foreclosure book (from the LA Times Money & Company blog):

California has reached a $6.5-million settlement with two former Countrywide Financial Corp. executives that the state had accused of predatory lending. The state will create a foreclosure relief fund for troubled borrowers with part of the money, Attorney General Kamala D. Harris said Wednesday. Read more

No magic words at the ECB

Accordingly, the Governing Council will continue to monitor all developments over the period ahead very closely

– ECB President Jean-Claude Trichet, at Thursday’s press conference. Read more

EU debt-drenched vs EM erratics

Bob McKee — he of Belgian-short fame — is back.

And the Independent Strategy economist reckons we’re in for quite a reversal — in emerging market risk. His argument, in a nutshell, is that risk appetite for all-things-EM has spun out of control recently. And– what with things like political instability and inflation rising in EM areas — that trend is about to end. Read more

Markets Live transcript 3 Feb 2011

Live markets commentary from FT.com 

Silent capital, backdoor Basel

Two months after Basel III formally landed and the lobbying has intensified.

According to Euro Intelligence — citing an FT Deutschland story — it’s not the banks pushing for some tweaks, but the sovereigns guaranteeing them. Quite a reversal. Read more

Unilever results – The Verdict

Here’s what the City thinks of the fourth quarter/full year results.

At pixel time, shares in Unilever were 8p higher at £18.66. Read more

Copper hits $10,000, other commodities surge

Copper traded on the London Metal Exchange has hit a record price of $10,000 a metric ton, Bloomberg reports. Tin prices reached $30,800, another record, on bets that economic recovery is galloping ahead. The United Nations’ Food and Agriculture Organisation also confirmed that global food prices hit a record high in January and warned of increases further down the line, Reuters says. Traders are also convinced that the current spike is yet to peak due to bad weather worldwide, the FT adds. Interest rate hikes to tackle inflation meanwhile look few and far between. China in particular can’t hike rates too sharply this year — even though rates adjusted for inflation are highly negative, according to Reuters.

Japan’s merger of steel

It’s happening — finally.

Decades after shakeouts in Japan’s heavy industries saw shipbuilders and miners downsize and in some cases fade away, a new wave of mega-consolidation is underway, this time in Japan’s steel industry. Read more

States widen probe into pension fund FX trades

An organised group of whistleblowers is assisting state prosecutors in their probe into whether banks overcharged public pension funds for currency transactions, the WSJ reports. The investigation centers on whether the trades were billed at the highest FX price on the day they were concluded, rather than at the rate the banks paid. Harry Markopolos, who famously warned about Bernard Madoff’s Ponzi fraud, is orchestrating the whistle-blowing effort, according to people familiar with the matter. A source added that Markopolos was involved in setting up shell companies that brought suits in Virginia and California, against BNY Mellon and State Street respectively.

Gulf Keystone Productions

Surely there are better things for an oil explorer to spend money on?

 Read more

Markets look to ECB rate decision

Analysts unanimously expect the European Central Bank to avoid becoming the first G4 central bank to begin raising interest rates at a meeting later on Thursday, but a sharp signal on rising inflation is expected, Reuters reports. Eurozone inflation has hit 2.4 per cent, above the bank’s ‘below but close to’ target of 2 per cent. In fact, the signal may depend on a certain pair of ECB code words, writes FT Alphaville. “Strong vigilance” or “heightened alertness”: If you hear either of these phrases at Thursday’s ECB press conference (which starts at 1.30pm London time) then brace yourself for an early interest rate rise. In every previous rate-hike cycle, use of the terms was a signal that an increase was not far away.

Petrobras to raise $40bn to develop fields

Petrobras, Brazil’s national oil company, plans to raise up to $40bn in debt by 2014 as it prepares for the development of its “pre-salt” oilfields, according to its chief executive Jose Sergio Gabrielli, the FT reports. The target, which follows a $6bn bond issue two weeks ago that was the biggest in Brazilian corporate history, would significantly raise Petrobras’ debt ratios, but not to levels that would jeopardise its investment grade status. Raising debt on this scale means that Petrobras will dominate corporate debt markets in the country for the next three to four years.

The ECB’s code words

“Strong vigilance”.

“Heightened alertness”. Read more

Five dead in Egypt clashes

Brent crude futures have jumped to $103 a barrel after supporters of the Egyptian president attacked and killed anti-government protesters, says Reuters. Five people died and more than 800 were injured in a night of prolonged violence, the FT reports. European leaders have made a joint statement calling on a rapid transition to representative government to being immediately. Other Arab regimes are also bracing themselves for “days of rage” protests across the region from Thursday, following Egypt’s turmoil, the FT adds. Algeria and Libya remain highly vulnerable to large-scale unrest. Gillian Tett’s piece today is a must-read on geopolitical risk now joining credit, liquidity and sovereign risks as pieces of the financial system that investors can no longer ignore.

Nippon Steel and Sumitomo to merge

Japan’s Nippon Steel is likely to acquire Sumitomo Metals Industries next year, creating the world’s second-largest steel-maker with a market value of $11bn, Reuters reports. The companies already own minority stakes in each other and maintain operational links. The global steel industry is scrambling to consolidate in the face of surging raw materials prices. A combination of Nippon Steel and Sumitomo would stand a good chance of competing in the Asian market, and would offer a diversified product line-up compared to ArcelorMittal, the world’s biggest steel company. The real mystery, then, is why on earth the deal hasn’t been made sooner, FT Alphaville says.

News Corp profit doubles

Net income at News Corp has more than doubled to $642m for the fiscal second quarter, despite deep cuts at MySpace triggering a $275m charge, reports the FT. The US media group said were MySpace results came in “below expectations”. Chase Carey, chief operating officer, confirmed the site “may be better developed under a new ownership structure”. Analysts have questioned bidders’ appetite, and Carey gave no indication of when MySpace might be sold, or at what price. The charge on News Corp’s digital media group came after MySpace cut half its staff and marred otherwise strong results, in which rising cable and broadcast television profits more than offset declines in film and digital media.

SAC Capital assures investors on probe

Steve Cohen, head of the $12bn SAC Capital hedge fund, has assured his investors that they will suffer “no financial impact” as a result of a wide-ranging federal investigation into insider trading on Wall Street, the FT reports. SAC has been subpoenaed along with several other hedge funds. Cohen told his investors in the letter that they would not suffer losses, or incur costs related to the probe, with the management company instead bearing any expense. The potential damage to a fund from association with the investigation can be considerable. FrontPoint, a $7bn fund which has not been accused of wrongdoing, closed a $1.2bn healthcare fund after a portfolio manager was alleged to have received tips about a drug trial.

Further reading

Elsewhere on Thursday,

- Gross tells it like it is: This is not God’s workRead more